If you go down to the woods today, make sure you don't get a big tax surprise

Most farms have some form of small wood or coppice on their land. Yet with the resident property market stagnating, a general mistrust of banks, poor returns on traditional financial products and an increased interest in sustainability (especially as oil and gas prices continue to rise), the value of woodland has seen a twenty per cent rise over the last eighteen months and this trend is set to continue for the foreseeable future. No longer can you assume that a particular belt of woodland has a small limited value.

Challenges by the Revenue

If you have no intention to sell the woodland away from the farm is this rise in value not all hypothetical ? On death, the value would be relievable and no inheritance tax payable – but can you actually guarantee that will be the case ? For those non-commercial woods, most landowners would assume that Agricultural Property Relief will automatically apply. However, with its growing value, HMRC are increasingly challenging that assumption. Essentially, agricultural relief is available on the agricultural value of agricultural property which has been owned and occupied for the purposes of agriculture for the required period. The first issue to consider is whether the open market value of the woodland is the same as its agricultural value. In the past this would normally be the case but with an active market and people purchasing woods and coppices for amenity purposes can this continue to be the case?

Woodland is only agricultural property if it is occupied with, and that occupation is ancillary to, agricultural land or pasture.

Are the areas covered by the woods an “add on” to or as a subsidiary part of the larger agricultural operation carried out on the other land with which they are occupied? Guidance given by HMRC indicates that shelter belts, fox coverts, coppices grown for fencing materials on the farm and clumps of amenity trees or spinneys will qualify for relief. Yet HMRC are now looking more closely at those farms where perhaps there is a slightly higher acreage of trees used as shelter belts compared to the farmland ancillary to it and how big does a clump of trees become before it is classed as a wood not being occupied with agricultural land?

Records are vital

All of this suggests that one needs to look carefully at the woodland sites on a farm and make contemporarious notes on any activities being carried out in the woodland and whether a bank of trees have been deliberately planted in the past to protect an adjacent field from the weather. This information has often passed down the generations orally and can be lost if not written down.

Does ownership and occupation matter?

Woodlands occupied for other than agricultural purposes such as amenity parkland or woodland used for the production of commercial timber will not be agricultural property. When the woodland area can be identified as ancillary to the agricultural land, there are further ownership and occupation tests to satisfy. Either the agricultural property has been owned for two years prior to death or if the agricultural property has been let out then the land must have been owned for seven years by the person to whom the claim applies and the land occupied throughout that time for agricultural purposes. It is important that the owner of the woodland and the owner of the farmland are one and the same. It is often the case that the farmland might be let to a local farmer but the woodland left inhand and therefore separating the link between the farmland and the woods.

What’s the alternative?

If the woodlands are run on a commercial basis then after two years of ownership Business Property Relief will apply. The key here again is to keep detailed records of investment, sales of timber, work undertaken, hours spent and detailed accounts showing gross and net profits. If neither agricultural property relief or business property relief apply then woodland relief might apply. This is not a relief but a deferment of the tax on timber growing in the UK. More on this subject in a future article.